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On 16 November 2016 the Sejm (lower chamber of the Parliament) adopted a bill to amend the VAT Act and certain other statutory laws, calling for numerous changes in the VAT Act and the Criminal Fiscal Code, among other laws.

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Dentons Rodyk & Davidson LLP, part of the world’s largest law firm, Dentons, is pleased to announce that John Dick has joined the Firm as part of its Energy, Resources and Infrastructure practice and its South East Asia regional practice.

On October 1, 2013, the new California Safer Consumer Products Regulations (“Regulations”) will become effective, establishing a complex approach for “greening” California commerce by reducing and eliminating toxic chemicals in consumer products used, sold or leased in the State. Under the new program, the California Department of Toxic Substances Control (DTSC) will implement the mandate of California’s Green Chemistry Initiative Law, AB 1879, which requires DTSC to develop the following:

A process for identifying and prioritizing chemicals of concern (COCs) in consumer products;

A process for conducting alternatives analyses (AAs) of COCs in consumer products (referred to as “Priority Products” in the regulations), i.e., assessing COCs in Priority Products, and their potential alternatives, to limit exposure or reduce the level of hazard of the COC; and

Regulatory responses based on the results of the AAs, which can range from product labeling to end-of-life management requirements to prohibitions.

The final Regulations present many compliance challenges for businesses in California. Technical complexities, substantive scrutiny and agency uncertainty all loom large for the regulated community. A less publicized business risk also applies to every entity associated with a consumer product:

The extreme transparency of the Safer Consumer Product (SCP) program threatens intellectual property rights and duties of “responsible entities” throughout product supply chains.

DTSC’s policy of public disclosure under the SCP Regulations will create commercial stress on continued protection of trade secrets by supply chain members – trade secret duties and public disclosure obligations are simply not compatible. This alert will identify trade secret issues and potential intellectual property (IP) pitfalls facing California businesses subject to the SCP Regulations.

While IP issues are nothing new in commercial relationships and product supply chains, the SCP Regulations up the ante because public transparency is unrestrained. The express statutory intent is to increase public information about the chemical constituents of products. In fact, the statute directs creation of a universal “Toxics Information Clearinghouse” that compiles hazard traits and toxicity details from “regional, national and international” sources. Of course, a “right-to-know” objective is consistent with many chemical regulation schemes throughout the United States.

However, the SCP Regulations differ from more reasonable disclosure programs because of two major factors:

1) A very strong bias for public access to the proprietary, chemical information submitted during the assessments and alternatives analyses for Priority Products; and

2) An inexperienced IP “gate-keeper” to reasonably evaluate and grant the trade secret protections built into the Green Chemistry Initiative and SCP Regulations.

The first factor is generally unchangeable due to the statutory language and intent of California’s Green Chemistry Initiative. All businesses have to deal with the transparency imposed during the actual SCP Priority Product evaluation process. This factor alone informs business decisions on how (or if) to stay in the California consumer product market. But the second factor is the real wildcard.

DTSC is legally obligated to evaluate SCP trade secret claims, but the regulated community must recognize and plan for limitations on regulatory protection for trade secrets. Every California business must carefully safeguard all trade secrets and proprietary IP that is remotely associated with any submittals to DTSC under the SCP Regulations. Failure to consistently assert trade secret protection under the SCP Regulations can waive confidentiality, leading to public disclosure of proprietary information by DTSC. (NB: These trade secret disclosure risks also may not be obvious to responsible entities towards the end of the supply chain.)

What is a “Trade Secret” Under the SCP Regulations?

The Green Chemistry Initiative incorporates California statutory definitions to guide DTSC review of trade secret claims. For trade secret protection, the SCP Regulations rely on the substance of the California Uniform Trade Secret Act (Civil Code §§ 3426 et seq.), and the public disclosure limits identified in the Government Code (§ 6254.7). In summary, DTSC may withhold information from public disclosure that is:
…any formula, plan, pattern, process, tool, mechanism, compound, procedure, production data, or compilation of information which is not patented,…[is kept secret and provides]…a business advantage over competitors who do not know or use it…

The basic showing under California law requires use of reasonable means to consistently protect IP from disclosure, and the continuing need for secrecy to maintain the value of the trade secret. Of course, there are many more trade secret complexities than can be identified in this Advisory. But if IP information provides business value, precisely because it is secret and unknown to competitors, California courts will often uphold trade secret protection.

A broad range of items can be trade secrets, such as business plans, client lists, spreadsheets, bid specifications, etc. Proprietary chemical mixtures, processes and related product information should qualify as a trade secret. The critical trade secret issue for California businesses is to closely follow procedural requirements of the SCP Regulations. By strictly following procedural rules and providing the substantive documentation requested by DTSC, a responsible entity has a chance of protecting trade secrets, despite the extreme transparency of the SCP Program.

With certain exceptions for hazard trait submissions, trade secret claims are clearly permitted. That is the good news. The bad news is the onerous showing DTSC requires to support trade secret protection. Responsible entities protecting trade secrets arguably face a greater burden under the SCP Regulations than under the California statutes cited by the Green Chemistry Initiative legislation! Nonetheless, this onerous process is theonly means for businesses to protect proprietary assets and IP from public disclosure under the SCP Regulations.

These procedural issues are even more daunting because numerous written submittals to DTSC are required throughout the SCP review and evaluation process. These submittals necessarily will include very detailed product composition or chemical identity data, including proprietary IP. And unless disclosure protection is sought at the time of submittal, all information is assumed to be publicly available to any interested parties (e.g., consumer/environmental watchdog groups, government agencies, business competitors, etc.). DTSC also plans to provide public notices and lists summarizing its SCP compliance reviews, deficiency findings and disapproved submittals for specific Priority Products. The SCP process itself creates a very high risk of trade secret disclosure.

To invoke trade secret protection, the submitting party must identify all IP and related information it seeks to protect, and provide specific, detailed justification for the protection. The submitting party also must provide clean and “redacted” versions of its DTSC submissions, with redactions allowed only as necessary to protect confidential IP. These redacted versions will be publicly disclosed, potentially undermining protections, by providing clues as to the basis for particular trade secret claims. Strategic and comprehensive redaction will be an absolute necessity to promote confidentiality, and to preserve the record for judicial intervention (if necessary).

When triggering trade secret review, submitting parties must carefully document the justification for their claims. The actual substance required by DTSC includes very specific evidence in response to twelve (12) separate subsections (22 CCR §§ 69509(a)(1)-(12)). Evidence justifying the trade secret claim must be submitted at the time the DTSC protection is sought, and includes, among other things:

Monetary value of trade secret development and business use;

Details of confidentiality measures employed for the trade secret(s), including copies of private non-disclosure agreements if relevant to the claim;

Estimates of difficulty to duplicate the protected information;

Potential commercial harms from public disclosure by DTSC; and

A signed statement by an executive certifying the truth, accuracy and completeness of the submission.
The SCP “evidence” required by DTSC can intrude on company privacy, breach commercial agreements, implicate confidential supply chain details, and can itself be a trade secret. While proving up a trade secret in any forum necessarily involves details of a company’s business practices, the SCP Regulations appear to go overboard on evidentiary justification. That said, a critical component of attempted trade secret protection is creation of a complete and strategic SCP administrative record. Such record is necessary for use if (or when) judicial intervention is necessary to protect proprietary IP from disclosure.

The latter issue described above – using trade secrets to justify trade secrets – is a real problem, given how products are developed, manufactured and finished through a supply chain. DTSC’s Final Statement of Reasons acknowledges this problem (the “infinite substantiation loop with respect to [trade secret] justificatory documents”). So after the second trade secret is documented via submission to DTSC (clean and redacted versions), no further support proof is needed or reviewed by DTSC. This “solution” is described as a way “to minimize DTSC’s administrative burden” in trade secret review. But it is really another example of DTSC’s limitations in evaluating trade secrets, highlighting the potential problems caused by an inexperienced IP gate-keeper.

When DTSC Rejects Trade Secret Claims: What Then?

With DTSC dispensing its own interpretations of California trade secret law under the SCP Regulations, parties must be prepared to quickly respond if DTSC rejects trade secret claims. Judicial intervention is the only recourse for a party whose trade secret claim is denied. Within thirty (30) days of DTSC’s final determination that no trade secret protection is warranted, either from substantive review or lack of sufficient evidence provided, the submitting party can seek judicial relief to prevent public disclosure (e.g., preliminary injunction or declaratory relief). While the judicial action is pending, including any appeals, DTSC may not disclose the trade secret information to the public.

However, judicial review triggers its own disclosure risks: Trade secret litigation is a public process with its own set of confidentiality protections that are not uniformly applied. Judicial review also presents uncertainty on outcome, given the strong policy of public transparency under the Green Chemistry Initiative. In addition, California’s trade secret law is constantly evolving, as new technology and forms of IP are created and used for commercial purposes. The tension between the public “right-to-know,” and the private “right-to-innovate-and-protect,” will likely be resolved on a case-by-case basis, in front of numerous different judges. Though specific legal outcomes are uncertain, it does seem certain that DTSC will be inundated with demands for trade secret protection under the SCP Regulations. The only other choice is to leave the California consumer product market altogether.

Reduce Your Transparency Exposure: Cover Up and Protect Yourself

There are many substantive concerns and uncertainties raised by the trade secret provisions of the SCP Regulations. But responsible entities have no choice but to submit confidentiality claims and trust DTSC to safeguard the trade secrets during the evaluation process. In reality, the SCP Regulations will likely cause overly comprehensive trade secret claims. Supply chain relationships, contractual duties and IP business practices will force invocation of the SCP trade secret protection process. Existing collaborative and confidential supply chain relationships often involve proprietary IP, and all involved parties must act in concert to protect confidential business information.

The irony is that one of the goals of California’s Green Chemistry Initiative is the promotion of innovation in product-sourcing and chemical composition. Yet the extreme transparency of the SCP product/chemical evaluation process undermines commercial incentives for innovation by creating such great risk of trade secret disclosure. If disclosure risks, both from consumer advocacy groups and business competitors, cannot be effectively managed by DTSC, innovative companies have little upside for developing proprietary processes or compounds to comply with the SCP Regulations.

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